While the general euphoria about the Internet sector, especially for e-commerce, suddenly went up (for the right reasons) immediately after MakeMyTrip's successful IPO on NASDAQ (in Aug 2010), there have been rather mixed news flow for the e-commerce in India in the past one month. Are we putting cold towel on the rise of e-commerce in India or is it too pre-mature to judge the things right now?

2010 was the tipping point for the Internet adoption in India and Internet users, Internet usage, e-commerce activities, online advertising, etc., started seeing massive growth. For context, if someone had placed a bet on the inflection point for the Internet in India a few years ago (between 2002 and 2008), he would have lost his shirt, because it took India almost one decade extra to reach the level where the USA or China reached.

Global investors had been very desperately looking for evidences in terms of when the Internet sector would start to look like the early years of Internet adoption in the USA and China. And when they saw some of those evidences/trends, they started investing heavily in the name of land grab and arguably, with low level of diligence.

E-commerce in India attracted hundreds of millions and almost all money went for similar type of business models, i.e., inventory risk horizontal or vertical e-commerce business models. However, these business models do not have a path to profitability until they scale to the levels unheard of (even Amazon with $70 billion in GMV still makes 0.5 per cent operating margin on core revenue). On top of that, the industry started doing many things which you cannot justify in low-margin industry, e.g., 1) COD, 2) free shipping as a norm and 3) very expensive, aggressive and less accountable (or lower ROI) marketing spend. In net-net, e-commerce companies in India ended up creating an operating cost structure of 45 per cent for 20 per cent-25 per cent gross profit margin industry. Thus, we started seeing companies closing down operations or distress sale by e-commerce companies (shortly after the thick chequebook issued by VCs/PEs thinned down).

So is the e-commerce party over in India?

No, I do not think so and let me highlight five reasons why, in fact, I strongly feel that e-commerce in India is still in its infancy and can grow 100x in the next decade:

1) Extremely low penetration: India is a $500 billion retail market and only $500 million of that is online (I do not include online travel as part of e-commerce and you should not either because nobody does it globally). With 0.1 per cent penetration, India is among the lowest e-commerce penetrated countries. For context, the USA is a $3.5 trillion retail market and $180 billion of that is online (6 per cent penetration) and China is $1 trillion retail market and $70 billion is online (7 per cent penetration). There is no reason why India should stay at an astonishingly low 0.1 per cent penetration.

2) Retail footprint is disappointing. The retailable space in India is in short supply (especially in 2nd to 4th tier cities), expensive, and creates challenges in terms of accessibility and efficiency. Seventy per cent of the people in most countries like to shop within 15 minutes' radius of where they live and India offers one of the worst retail footprint on that metric. The organised retail sector in India will continue to have limited footprint due to the harsh realities of the real estates in India.

3) Basic ecosystem has reached the minimum threshold level. The basic ecosystem for e-commerce in India remains much weaker than most large Internet economies, although it has improved to the level where it would not see downhill trends. Now it is up to the industry players, entrepreneurs and innovators to take it to the next level. But basic ecosystem is congenial for e-commerce growth.

4) Benefits of e-commerce are way too compelling for both providers and consumers. The benefits of e-commerce, while may sound most basic list of benefits once can highlight but ask retailers, who will bet an arm and a leg to get those benefits. So the key benefit list for retailers goes like this: Business is open 24/7 and 365 days, pan-India reach versus just 30 km radius, better inventory management, better control on operations, higher margins at scale, low capex and shorter gestation period. Not to ignore the benefits to consumers, i.e., pricing, selection, convenience, etc.

5) Customers are not going back. Consumers in India are now hooked to e-commerce and this trend is only going to become more mainstream. Out of the 125 million Internet users, a minimum of 10 per cent will be shopping online this year. This is a rather large number and by 2015, the total number of Internet users can reach 300 million, out of which 25 per cent may shop online, which means 75 million people will be shopping online by 2015.

So where is e-commerce heading in India?

E-commerce in India can grow by 100x-140x by 2020. If you grow the current retail market of $500 billion by 10 per cent CAGR, Indian retail market can reach $1 trillion by 2020. Also, if you take 0.1 per cent penetration of e-commerce to7 per cent penetration (same as in China) by 2020, we are talking about $70 billion in e-commerce revenue, up from $500 million currently a 140x growth in nine years.

So India can sustain this level of growth. What is not clear is what business model will also have the path to profitability. For whatever it is worth, except for the USA, non-inventory risk marketplace models have won, especially in the emerging market where the market has some common characteristics such as choppy demand, highly fragmented industry, poor logistics, lower depth and breadth of merchandize, and high cost of capital.

The bottomline is that e-commerce is here to stay and very likely to be 100x-140x bigger industry by 2020 versus CY11. However, the era of irresponsible and non-accountable new market creation has ended and companies with innovative business models, strong teams, cost consciousness, inherit business model advantage and responsible marketing spend will win versus the first movers.

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